Real Estate Cap Rate Calculator
Property Details
Income (Annual or Monthly)
Annual Operating Expenses
Gross Scheduled Income (Annual):
$0.00
– Vacancy Loss:
-$0.00
= Effective Gross Income:
$0.00
– Total Operating Expenses:
-$0.00
= Net Operating Income (NOI):
$0.00
Capitalization Rate (Cap Rate):
0.00%
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly referred to as Cap Rate, is one of the most popular metrics used in real estate investing to evaluate the profitability and return potential of an investment property. It represents the ratio between the property's Net Operating Income (NOI) and its current market value or purchase price.
Unlike metrics that factor in mortgage payments (like Cash-on-Cash Return), the Cap Rate assumes the property is purchased with all cash. This makes it an excellent tool for comparing the relative value of different properties regardless of financing methods.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Property Value) × 100
Understanding the Variables:
- Net Operating Income (NOI): This is your annual revenue minus all operating expenses. Operating expenses include taxes, insurance, management fees, maintenance, and utilities, but exclude mortgage payments and capital expenditures (like replacing a roof).
- Property Value: This is typically the purchase price of the property or its current fair market value.
What is a Good Cap Rate?
There is no single "good" Cap Rate because it varies significantly by location, property type, and the current economic environment. However, generally speaking:
- 4% to 5%: Common in high-demand, low-risk areas (like downtown NYC or San Francisco). These properties usually have high appreciation potential but lower immediate cash flow.
- 6% to 8%: Often considered a healthy balance between risk and return in stabilized suburban markets.
- 8% to 12%+: Typical in riskier markets or for properties requiring significant renovation. While the return is higher, the risk of vacancy or heavy maintenance is also higher.
Why Use This Calculator?
Calculating NOI manually can be prone to errors, especially when factoring in vacancy rates and percentage-based management fees. This calculator ensures you account for:
- Vacancy Loss: Even the best properties aren't occupied 365 days a year. A 5-8% vacancy allowance is standard.
- Management Fees: Even if you self-manage, you should account for your time or the cost of future management (typically 8-10% of gross rent).
- True NOI: By stripping away financing costs, you get a clear picture of the asset's raw performance.